In an uncertain environment posing challenges to competitiveness and unable to rely on external demand, European economies are managing to accelerate activity at a pace in line with their potential. Whether through measures to facilitate disinflation or support for private and public investment, fiscal stimulus is coming to the rescue, while central banks are taking a break, with inflation fully under control in the Eurozone and partially so in the United Kingdom. The effects of the customs shock appear moderate at the aggregate level, but are more severe in certain countries. The risks associated with this resilience scenario are skewed to the downside, with a reorganisation of trade flows increasing competition on global markets and in the single market.
After the US trade fog lifts, growth rates are recovering
The global economy continues to show resilience in the face of uncertainty and a series of shocks. In the United States, growth remained strong in 2025, albeit slowing, driven by investment in AI and rising incomes, particularly from capital. We anticipate growth above 2%, driven by high profitability, household wealth effects and fiscal support. Job creation is slowing, but the decline in the immigrant labour force is capping the rise in unemployment. Inflation is expected to remain above 3% until mid-2026, with the Fed pausing until the end of 2026 at 3.75%. Continued disinflation would allow for a decline to 3.50% in mid-2027. The gap between US and Eurozone key interest rates is expected to stabilise in 2026, with the ECB deposit rate unchanged at 2%, but it is expected to narrow with successive increases by the ECB in 2027 to 2.5%. The euro would therefore depreciate moderately in 2026 before appreciating again in 2027.
For the major emerging economies, we expect a limited slowdown in exports and GDP growth unlikely to decline significantly. China should show resilience, with growth falling from 5.0% in 2025 to 4.7% in 2026, stimulated by public investment in infrastructure and certain targeted industries, and fiscal support for household consumption.
❝ The rise in prices of US imports from the EU supports the hypothesis that costs are being absorbed by importers❞❞
The expected developments in fossil fuels also remain favourable for growth. Marked by relatively sluggish demand and an increase in OPEC+ supply, the oil market is expected to remain in surplus, despite the risk linked to US threats on Russian oil imports. The price of Brent crude is expected to remain stable at $63 per barrel. The fall in gas prices reflects market confidence, buoyed by booming US exports and new global liquefied natural gas infrastructure
Fiscal stimulus to support domestic demand in the face of sluggish foreign demand
The Eurozone and the United Kingdom are expected to grow by 1.2% in 2026, after 1.4% in 2026. The slowdown in the annual average is the result of growth gains and does not reflect the acceleration seen in the quarterly profile of the two scenarios, which is expected to continue in 2027 (at a rate of 1.3% for the Eurozone and 1.4% for the United Kingdom). External demand would continue to slow growth further across the Channel, where higher contributions have damaged competitiveness. Consumption would accelerate, but at modest rates, benefiting in the United Kingdom from later and more pronounced disinflation. While the acceleration in activity in the Eurozone is due to increased public and private investment, capital accumulation in the United Kingdom would continue at the same pace. If the ECB grants a pause in 2026, satisfied with the return of inflation to target, the BoE is expected to make a final rate cut in 2026 with underlying inflation still high.
Within the Eurozone, Germany would be the driving force behind the acceleration, with growth of 0.9% in 2026. The infrastructure and defence spending plan and greater borrowing capacity for federal states would boost investment, with positive spillover effects on other economies. In France, supportive factors (increased defence spending in the European Union, Germany's fiscal bazooka, but also revival of domestic investment) would outweigh the headwinds (notably higher US tariffs). Political instability would no longer weigh particularly heavily on growth, but fiscal adjustment would be limited. In Italy, growth would remain limited to 0.5% in 2026 before reaching 0.8% in 2027. Household consumption and productive investment should cushion the slowdown thanks to a number of support measures planned for 2026, although fiscal room for manoeuvre remains limited overall. The pace of activity remains constrained in the long term by the expected correction in the construction sector, exposure to external shocks and the need for fiscal consolidation. The gradual deceleration in growth in Spain, from 2.8% in 2025 to 2.2% in 2026, is the result of its refocusing on domestic demand. Private consumption and investment continue to support activity, against a backdrop of moderating public consumption and the gradual normalisation of the labour market.
Relative resilience of European exporters
While tensions over Greenland show how much the threat of further tariff increases persists, the negative effects of the Tunberry agreement on EU countries appear limited to date. Prices for goods imported by the United States from the EU have been rising since May, supporting the assumption that US importers are absorbing the costs rather than demanding discounts from European exporters. The latter have already reduced their margins following the appreciation of the euro and have little room to further lower the prices of their exports. They can rely on the uniqueness of their products and the limited excess capacity of US producers to substitute their products, even if there is a risk of substitution by third-country products on the US market, despite more advantageous customs duties than their competitors. The proven impact on exports is in line with our estimate, i.e. a 1.6% decline in volume over the first ten months of 2025 (taking into account advance exports in Q1) compared to the same period in 2024. It should be noted that this decline is of the same magnitude in the US market and in global markets as a whole, reflecting a more generalised decline in competitiveness, probably linked to the appreciation of the euro. However, the decline in exports varies between countries and sectors, with Germany and Italy suffering losses greater than the EU average.
Increased threats to the single market
Beyond potential losses of market share in the United States, the risk for European countries is that they will lose competitiveness on global markets and on the single market. Chinese overcapacity and the closure of the US market to Chinese products pose a considerable challenge to the European economy. The gains in market share by Chinese products in the single market over the last year are the result of a shift towards Europe of exports that were previously directed towards the American continent. The value of imports from China since 2022 has increased by €55 billion compared to their pre-Covid average (2015-2019). In its monitoring of the reorientation of Chinese flows towards the EU, the European Commission identifies sectors at risk of a harmful increase in exports since January 2025. It records the frequency of products for which there has been a minimum 5% increase in imports accompanied by a minimum 5% decrease in price. The distribution of these signals reflects a significant increase in Chinese imports in the plastics and non-metallic minerals, chemicals, electronic products, textiles, machinery and equipment, and transport equipment sectors. The monitoring reports, in particular, a very sharp increase in imports of Chinese hybrid vehicles (not covered by countervailing duties on electric vehicles), which rose from 24,500 units in the first three quarters of 2024 to 122,000 in the first three quarters of 2025, while registrations increased by only 31%.
The significant price declines associated with this penetration mean that a disinflationary impulse is in the pipeline for non-energy industrial goods prices.
See our publication Europe – 2026-2027 Scenario: fiscal policy as a resistance tool, January 2026